Federal Appeals Court Reinstates Injunction Against the CTA, Pending Appeal

Federal Appeals Court Reinstates Injunction Against the CTA, Pending Appeal

At approximately 8:15 p.m. Eastern Time on December 26, 2024, the United States Court of Appeals for the Fifth Circuit (Fifth Circuit) reversed course from its prior ruling in Texas Top Cop Shop, Inc., v. Garland to allow a lower court’s nationwide preliminary injunction stand against the Corporate Transparency Act (CTA), pending the Government’s appeal. This means that, once again, the Government, including the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), is barred from enforcing any aspect of the CTA’s disclosure requirements against reporting companies, including those formed before January 1, 2024. This decision prevents FinCEN from enforcing its recently announced deadline extension that would have deferred the compliance deadline for such existing entities from January 1, 2025, to January 13, 2025.

This abrupt about-face appears to be the result of a reassignment of Texas Top Cop Shop, Inc., v. Garland from one three-judge panel of the Fifth Circuit to another. The Fifth Circuit’s prior decision was issued by a “motions panel,” which decided only the Government’s motion to stay the lower court’s injunction. The motions panel also ordered that the case be expedited and assigned to the next available “merits panel” of the Fifth Circuit, which would be charged with deciding the merits of the Government’s appeal. Once the case was assigned to the merits panel, however, the judges on that panel (whose identities have not yet been publicized) appear to have disagreed with their colleagues. The new panel vacated the motions panel’s stay “in order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments.” The Government must now decide whether to seek relief from the United States Supreme Court, which may ultimately determine the fate of the CTA.

Varnum’s CTA Taskforce is closely tracking this case, as well as the dozen other pending cases challenging the constitutionality of the CTA, and will provide updates as they become available.

FinCEN Extends Certain Deadlines After Federal Appeals Court Revived CTA Reporting Obligations 

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Updated December 26, 2024: the Fifth Circuit reversed its prior decision, reinstating a nationwide injunction against the Corporate Transparency Act (CTA). This bars the government and FinCEN from enforcing the CTA’s disclosure requirements, including recently extended compliance deadlines. Read the latest in our recent advisory.

Updated December 24, 2024

Within hours of the Fifth Circuit’s ruling that lifted a nationwide preliminary injunction against the CTA, FinCEN announced that it had extended certain compliance deadlines, including:

  • Reporting companies created or registered prior to January 1, 2024, that had a filing deadline of January 1, 2025, now have until January 13, 2025, to file their initial reports with FinCEN.
  • Reporting companies created or registered on or after September 4, 2024, that had a filing deadline between December 3, 2024, and December 23, 2024, now have until January 13, 2025, to file their initial reports with FinCEN.
  • Reporting companies created or registered on or after December 3, 2024, and on or before December 23, 2024, now have an additional 21 days from their original filing deadline (i.e., 90 days from creation or registration, plus 21 days) to file their initial reports with FinCEN.

As a reminder, reporting companies created or registered on or after January 1, 2025, have 30 days to file their initial reports with FinCEN. This compliance deadline is unchanged.

Additionally, the CTA requires any reporting company that has filed an initial report with FinCEN to submit an updated report within 30 days of certain events, including any change to information required to be reported to FinCEN. This compliance obligation is unchanged.

On December 24, 2024, the Plaintiffs in Texas Top Cop Shop, Inc. v. Garland filed an emergency petition with the Fifth Circuit for en banc review of the panel’s decision to stay the lower court’s injunction. According to the Plaintiffs, the panel’s ruling that the CTA is a valid exercise of Congress’s commerce power is in “plain conflict” with U.S. Supreme Court precedent. The Plaintiffs request that a decision be made by January 6, 2025, which is one week before the extended compliance deadline described above. Varnum will continue monitoring developments.

December 23, 2024

At approximately 1:30 pm Eastern Time on December 23, 2024, the United States Court of Appeals for the Fifth Circuit (Fifth Circuit) revived the immediate enforceability of the Corporate Transparency Act (CTA). In Texas Top Cop Shop, Inc. v. Garland, a three-judge panel of the Fifth Circuit stayed a lower court’s nationwide preliminary injunction against the CTA, which was issued on December 3, 2024. This means that, among other obligations, the January 1, 2025, compliance deadline for reporting companies in existence as of January 1, 2024, is back in effect.

This situation is rapidly evolving. In the coming days, the challengers in this case could seek further review from the Fifth Circuit or seek relief from the United States Supreme Court. Additionally, several other federal courts are actively considering challenges against the CTA. At the time of this publication, the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has not publicly released any guidance based on today’s ruling.

Varnum’s CTA Taskforce is closely tracking this case, as well as the dozen other pending cases challenging the constitutionality of the CTA and will provide updates as they become available. 

Federal Court Enjoins Enforcement of the CTA Nationwide; Reporting Companies “Need Not Comply” with January 1 Deadline

Federal Court Blocks Corporate Transparency Act Nationwide

Updated December 26, 2024: the Fifth Circuit reversed its prior decision, reinstating a nationwide injunction against the Corporate Transparency Act (CTA). This bars the government and FinCEN from enforcing the CTA’s disclosure requirements, including recently extended compliance deadlines. Read the latest in our recent advisory.

Varnum will continue monitoring developments.

On December 3, 2024, a Texas-based federal court issued a sweeping order prohibiting the federal government from enforcing the Corporate Transparency Act (CTA) anywhere in the country. Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.). The Court held that the CTA—which would have required an estimated 32.5 million companies in the United States as of January 1, 2024, to submit sensitive information regarding their “beneficial owners” (BOI) to the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) by January 1, 2025—was likely unconstitutional and that its implementation would irreparably harm reporting companies if they were forced to comply. The Court enjoined the CTA’s enforcement nationwide, specifically stating that neither the Act nor its related regulations may be enforced, and that “reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline[.]”

The Court determined that Congress exceeded its legislative powers when it enacted the CTA, which the Court characterized as “quasi-Orwellian.” In the Court’s view, upholding the CTA and its requirement that most entities created or registered under state law must continually disclose information to the federal government “would be to rubber-stamp a new form of federal power” that would “threaten the very fabric of our system of federalism.” The Court saw the CTA as a dangerous precedent, observing that “[i]f the Court were to sanction such an extension of legislative power today, then there is no telling how Congress would control companies tomorrow. The fact that a company is a company does not knight Congress with some supreme power to regulate them in all aspects—especially through the CTA[.]” The Court further found that forcing reporting companies to comply with the CTA substantially threatens their constitutional rights. Given the CTA’s constitutional flaws and threatened harm, the Court enjoined the federal government from enforcing it pending further order of the Court.

Key Takeaways

Unlike other court decisions that have examined the CTA’s constitutionality, Texas Top Cop Shop explicitly enjoined the CTA nationwide, finding that “[a] nationwide injunction is appropriate in this case.” This means that “[existing] reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline,” and that FinCEN cannot enforce any of the CTA’s penalties for willful noncompliance against entities or individuals.    

In addition to existing companies whose reporting deadline was just weeks away, the CTA required companies created or registered in the United States during 2024 to submit a BOI report to FinCEN within 90 days of creation or registration, which timeframe would have shortened to 30 days as of January 1, 2025. According to FinCEN’s estimates, 5 million companies are created or registered in the United States each year and would be captured. As of last month, reportedly more than 8 million BOI reports had been submitted to FinCEN, most of which were presumed filed by newly formed reporting companies. The Court’s order enjoins enforcement of the entirety of the CTA.

The Court’s decision will likely not be the final word on the CTA’s enforceability. To begin, the Court entered only a preliminary injunction, which it could theoretically reconsider at some point in the future. The more likely next step, however, is that the government will immediately appeal this decision to the United States Court of Appeals for the Fifth Circuit. A further appeal could be taken to the United States Supreme Court. But unless a court specifically dissolves the Texas Top Cop Shop injunction, companies will not be required to comply with the CTA’s reporting requirements. 

Varnum’s CTA Task Force is closely tracking this case, as well as the dozen other pending cases challenging the constitutionality of the CTA, and will provide updates as they become available.

This advisory was originally published on December 4, 2024.

Federal Court Strikes Down the Corporate Transparency Act as Unconstitutional

Federal Court Strikes Down the Corporate Transparency Act as Unconstitutional

On March 1, 2024, the federal judge presiding over the lone case testing the validity of the Corporate Transparency Act (CTA) struck down the CTA as unconstitutional. As we have explained, through the CTA, Congress imposed mandatory reporting obligations on certain companies operating in the United States, in an effort to enhance corporate transparency and combat financial crime. Specifically, the CTA, which took effect on January 1, 2024, requires a wide range of companies to provide personal information about their beneficial owners and company applicants to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). More than 32.5 million existing entities are expected to be subject to the CTA, and approximately 5 million new entities are expected to join that number each year. By mid-February, approximately a half million reports had been filed under the CTA according to FinCEN.

The CTA’s enforceability is now in doubt. In National Small Business United d/b/a National Small Business Association v. Yellen, the Honorable Liles C. Burke of the United States District Court for the Northern District of Alabama held that the CTA exceeded Congress’s authority to regulate interstate commerce, and that the CTA was not necessary to the proper exercise of Congress’ power to regulate foreign affairs or its taxing power. The Court issued a declaratory judgment—stating that the CTA is unconstitutional—and enjoined the federal government from enforcing the CTA’s reporting requirements against the plaintiffs in that litigation. A nationwide injunction, which would have raised its own enforceability concerns, was not included in the Court’s ruling.

The Court focused on three aspects of the CTA. First, the Court highlighted that the CTA imposes requirements on corporate formation, which is traditionally left to state governments as matters of internal state law. Second, the Court observed that the CTA applies to corporate entities even if the entity conducts purely intrastate commercial activities or no commercial activities at all. Third, the Court concluded that the CTA’s disclosure requirements could not be justified as a data-collection tool for tax officials as that would raise the specter of “unfettered legislative power.”

What the Decision Means for Entities Subject to the CTA

The Court’s decision creates uncertainty on entities’ ongoing obligations under the CTA.  Although the Court purported to limit its injunction to the parties in the litigation before it, the lead plaintiff in the suit is the National Small Business Association (NSBA). In its opinion, the Court held that the NSBA had associational standing to sue on behalf of its members. Based on precedent, this means the Court’s injunction likely benefits all of the NSBA’s over 65,000 members. If so, the government is prevented from enforcing the CTA’s reporting requirements against any entity that is a member of the NSBA.

Regardless of membership in the NSBA, however, the Court’s declaratory judgment that the CTA is unconstitutional also raises serious doubts about the government’s ability to enforce the CTA’s reporting requirements. This could amount to a de facto moratorium on CTA enforcement, depending on the government’s view of the decision.

What Happens Next

The government will likely appeal this decision, but the Court’s injunction and declaration will remain in effect unless a stay is granted. To receive a stay, the government will first likely need to file a motion in the district court, which will consider (1) how likely it is that the government will succeed on appeal; (2) whether the government will be irreparably harmed without a stay; (3) whether a stay will injure other parties interested in the litigation; and (4) whether a stay would benefit the public interest. If the district court denies a stay, the government will be able to seek a stay from the Atlanta-based United States Court of Appeals for the Eleventh Circuit.

The government has 60 days to appeal, though it will likely file its appeal sooner given the grant of an injunction and decision’s far-reaching consequences. The grant or denial of stay should be resolved in the coming weeks, but the timing of any final decision from the Court of Appeals is uncertain. In 2023, the median time for the Eleventh Circuit to resolve a case was over 9 months. However, the key deadline by which tens of millions of companies otherwise must file their initial report under the CTA is January 1, 2025.

Varnum’s Corporate Transparency Act Task Force will monitor all developments in National Small Business United.  Contact any member of Varnum’s CTA Taskforce, or your Varnum attorney to learn more.

Corporate Transparency Act: Reporting Challenges for Foreign-Owned Companies

Corporate Transparency Act: Reporting Challenges for Foreign-Owned Companies
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On January 1, 2024, the beneficial ownership information reporting rule (BOI Rule) issued under the Corporate Transparency Act (CTA) came into effect, ushering in new reporting requirements for companies formed in the U.S. or registered to do business in the U.S. (collectively, reporting companies). 

The CTA and BOI Rule require the collection and disclosure of information identifying the individuals who beneficially own or exercise substantial control over reporting companies. While this task will be a burden for all types of reporting companies, the CTA and BOI Rule pose unique challenges for some foreign-owned companies, which often have complicated beneficial ownership structures, regular changes to management teams, a strong commitment to compliance measures, and a desire to avoid corporate liability and personal liability for members of their management team.

New CTA Reporting Requirements

As explained in a prior advisory, the new beneficial ownership information (BOI) reports will include: (a) for the reporting company, the name, trade name, address and employer identification number (EIN) or taxpayer identification number (TIN) of the reporting company; (b) for each individual who beneficially owns or controls 25% or more of the equity of the reporting company or exercises substantial control over the reporting company (each, a beneficial owner), his or her full legal name, date of birth, complete U.S. residential address, and information from (along with an image of) the individual’s unexpired U.S. passport, state driver’s license or other government-issued identification document; and (c) for certain individuals responsible for the formation of a reporting company on or after January 1, 2024, similar information to that required of beneficial owners.

The CTA and BOI Rule require reporting companies formed or registered to do business in the U.S. on or after January 1, 2024 to file a BOI report with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury within 90 days of its formation or registration (or, if formed or registered to do business in the U.S. on or after January 1, 2025, within 30 days of its formation). Reporting companies formed or registered to do business in the U.S. prior to January 1, 2024 receive a slight reprieve – they need to file a BOI report on or before January 1, 2025.

Once a reporting company has filed an initial BOI report, it must file an updated BOI report within 30 days of any change in the information required to be reported to FinCEN, including changes to reported BOI.

Limited Exemptions for Foreign-Owned Companies

The CTA includes 23 exemptions from the BOI reporting requirements; however, only a handful of them are likely to apply to foreign-owned companies, including the following:

Large Operating Company

Entities that directly employ more than 20 full time employees in the U.S., have an operating presence at a physical office in the U.S., and have filed a federal income tax return or information return demonstrating more than $5 million in gross receipts or sales from sources within the U.S. are classified as “large operating companies” and are exempt from BOI reporting. However, any failure to maintain employment or revenue figures will trigger filing requirements. Additionally, the company will need to be the owner or lessee of real property in the U.S., distinct from unaffiliated businesses, at which it conducts business to satisfy the “physical office” requirement—post office boxes and registered agent addresses will not suffice.

Publicly-Traded Company

Entities that have issued securities registered under Section 12 of the Securities Exchange Act of 1934 (1934 Act) or that are required to file supplementary and periodic information under Section 15(d) of the 1934 Act are exempt; however, this exemption will not cover entities that are listed only on a foreign exchange that do not have reporting obligations under the 1934 Act.

Subsidiary of Exempt Company

Entities whose ownership interests are entirely controlled or wholly owned, directly or indirectly, by certain enumerated exempt entities are themselves exempt, meaning that if a qualifying parent company is exempt, its subsidiaries may also avoid reporting requirements.

Importantly, no “upward” exemption to BOI reporting requirements exists for holding companies.

Reporting Challenges for Foreign-Owned Companies

Foreign-owned reporting companies that are not eligible for an exemption should keep the following issues in mind as they work with advisors to build a compliance plan for CTA reporting:

Analyzing all Members of Corporate Family

Foreign companies often establish a U.S. corporate presence by creating a holding company organized under the laws of Delaware or another U.S. state, with operations conducted through one or more subsidiaries. A compliance plan will be necessary for each entity formed under the laws of a U.S. state or registered to do business in a U.S. state to ensure that it is either exempt or that proper measures have been taken to comply with reporting requirements. Because privately held holding companies do not qualify for an exemption, reporting may be required at that level even if operating entities lower in the family tree are exempt as a “large operating company” or (for lower-tier entities) a “subsidiary” of any large operating company.

Monitoring Triggers for Updates

  1. Some foreign-owned companies rotate executives through director, officer and managerial roles with their U.S. subsidiaries after a limited period of time. These changes will trigger requirements to file updated BOI reports within 30 days of the change. Further, regular changes in U.S. leadership underline the importance of having a compliance plan in place for incoming executives to ensure that all necessary updates to BOI reports are timely filed.
  2. For purposes of filing BOI reports, beneficial ownership of equity is reported by looking through legal entities to identify individual owners or controllers of equity. Changes to a capitalization table of a parent entity organized and operating entirely outside of the U.S. may therefore trigger an obligation to file an updated BOI report in this country.

Inactive Entities

Foreign companies may own U.S. subsidiaries that were previously active but no longer conduct substantial business. While there is an exemption from reporting requirements for certain inactive entities, it is not available to companies owned by foreign persons. Owners of inactive entities should consider dissolving these entities prior to the deadline of any BOI report to avoid incurring reporting obligations or penalties for non-compliance.

Data Protection and Confidentiality

Reporting companies should consider how they will comply with data protection obligations and confidentiality requirements associated with the collection of personally identifiable information gathered pursuant to the CTA. It may be beneficial to designate a third-party provider to collect and store this information or direct persons to obtain a FinCEN identifier to mitigate risks associated with data protection, which can be costly. Companies may also need to consult local counsel in certain foreign jurisdictions to ensure that the collection and transmission of sensitive data from persons outside the U.S. is conducted in accordance with local law.

Access to Information for Disclosure

Foreign-owned reporting companies should consider including language in their formation and governance documents, employment agreements and employee handbooks that requires individuals to provide information necessary to facilitate CTA compliance. As changes to ownership of foreign parents may trigger update reporting obligations, similar measures may need to be considered with respect to parent companies. The reporting company should be prepared to take action to compel such disclosure, where possible, to avoid liability to the company and personal liability to senior officers.

Penalties for Non-Compliance; Personal Liability for Senior Officers

Those who disregard the CTA may be subject to civil and criminal penalties. A person who willfully fails to file a correct and complete initial BOI report or an updated BOI report required by law is subject to a fine of $500 per day (up to a maximum fine of $10,000) and is subject to imprisonment for up to two years.  FinCEN has stated that senior officers of entities that willfully violate the CTA and BOI Rule may be held liable under these penalty provisions.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact Greg Wright of our Business and Corporate practice team, any member of Varnum’s CTA Taskforce, or your Varnum attorney to learn more.

 

 

Corporate Transparency Act: Beneficial Ownership Challenges for Business Startups

Corporate Transparency Act: Disclosure and Reporting Requirements for Startups
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For newly formed businesses (startups), the first few years of operations are integral to the company’s success. Founders are concerned with hiring the right employees, developing intellectual property and products or service offerings, fundraising, investor relations, and now, they will also need to be concerned with the compliance requirements of the Corporate Transparency Act (CTA).

Congress passed the CTA in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a reporting company) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers (beneficial owners), and certain individuals involved in their formation to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The beneficial ownership information (BOI) reporting requirements of the CTA took effect on January 1, 2024. Those who disregard the CTA may be subject to civil and criminal penalties.

As explained in a prior advisory, a startup formed on or after January 1, 2024 is unlikely to fall into one of the CTA’s twenty-three (23) exemptions from the reporting requirements, so such startups will need to file a BOI report with FinCEN within ninety (90) days of its formation (or, if formed on or after January 1, 2025, within thirty (30) days of its formation), with updated BOI reports due within thirty (30) days of any change in the startup’s BOI as reported to FinCEN.

With complex capitalization tables, demanding investors and bespoke management structures, CTA compliance will present some unique challenges to startups, founders and officers.

Challenges in Disclosure

  1. 25% Owners: Nonexempt startups must disclose information about each individual that (directly or indirectly) holds 25% or more of the fully diluted equity of the startup. In order to calculate the fully diluted equity of the startup, a reporting company must consider the total number of shares that would be outstanding if all derivative instruments were exercised. This would include instruments such as stock options, simple agreements for future equity (SAFEs), convertible debt, and warrants. But the initial BOI report is just the beginning, as the set of persons whose details must be disclosed may change each time a derivative security expires, equity interests are sold, additional funds are raised, or the ownership structure of a corporate investor changes. Any such change may trigger an obligation to file an updated BOI report within thirty (30) days.
  2. Substantial Control: Nonexempt startups must also disclose information about any individual that (directly or indirectly) exercises substantial control over the startup. This includes:

    1. Senior officers of the reporting company;
    2. Persons who have the authority to appoint or remove certain officers or a majority of the board of directors of the reporting company;
    3. Persons who direct, determine or have “substantial influence” over important decisions of the reporting company, including decisions about its business, finances or structure; and
    4. Persons who otherwise exercise substantial control over the reporting company.

In the case of startups, this may require the disclosure of information about all members of the board of directors, as the relatively small size of most startup boards and the broad authority held by their members could bring those individuals within the definition above.

In addition, certain investors (including investors owning less than 25%) may get captured by the “substantial control” definition based upon their voting rights as owners of preferred stock, their negotiated veto rights over important decisions or actions, or other forms of influence over key appointments and decisions of the startup. The list of individuals who need to be included in the report will vary based upon the governance structure designed and negotiated by investors in the process of formation and fundraising, and each further round of investment or change in management will need to be scrutinized as a potential trigger for an updated report.

Challenges in Reporting

Each beneficial owner (including those who exercise “substantial control”) will need to provide his or her name, date of birth, current address, and photocopy of an acceptable identification document.  While this seems like information that would be easy to obtain, startups will face challenges.

    1. Structural Challenges: If the direct “beneficial owner” is an entity instead of an individual, the startup will need to conduct multiple levels of due diligence to determine the ownership structure and exercise of control at the level of that entity-owner. This may involve collecting detailed information about the ownership and management of complex investment funds and ownership vehicles, many of whom may be reluctant to provide details to founders.
    2. Reluctant Investors: Some investors may be hesitant or refuse to provide their details for personal or data privacy reasons. Others may take the position that the startup’s legal analysis that they qualify as beneficial owners is unsound. There is no good faith exemption for attempting to comply with the BOI reporting requirements. If the startup fails to comply with the CTA for any reason (including the acts or omissions of an uncooperative investor, director or officer), the startup will be out of compliance. Those that willfully fail to comply may face civil and criminal penalties.

Tools for Compliance

    1. Monitoring Triggers for Updates: As startups continuously raise funds, the ownership structure of the startup is constantly subject to change, and the resulting update requirements under the CTA are likely to be time-consuming and tedious for founders and investors. To meet this challenge, the startup will need to have protocols in place to monitor events likely to trigger an update requirement.
    2. Data Protection and Confidentiality: startups should consider how they will comply with data protection obligations and confidentiality requirements associated with the collection of personally identifiable information gathered pursuant to the CTA. It may be beneficial to designate a third-party provider to collect and store this information or direct persons to obtain a FinCEN identifier to mitigate risks associated with data protection, which can be costly.
    3. Ability to Gather Information for Disclosure: startups should include language in their formation and governance documents that requires investors, directors and officers to provide information necessary to facilitate CTA compliance as a condition to investing in or serving the startup. startups should also disclose the repercussions for investors and senior officers if an investor, director or officer fails to provide required BOI. Existing and potential investors, directors and officers may resist disclosing the necessary information, and the startup should be prepared to take action to compel such disclosure, where possible, to avoid liability to the company and personal liability to senior officers.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact Mallory Field of our Venture Capital and Emerging Companies team, any member of Varnum’s CTA Taskforce, or your Varnum attorney to learn more.

Beware of Corporate Transparency Act Scams and Fraud

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The Corporate Transparency Act’s (CTA) Beneficial Ownership Information reporting requirements are set to take effect on January 1, and bad actors are already using the CTA’s requirements to solicit unauthorized access to Personally Identifiable Information. To that end, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a warning regarding such scams. FinCEN describes these efforts as follows:

“The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests (emphasis added). Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.”

Be on guard against such fraud and stay abreast of key developments involving this new law by visiting Varnum’s CTA Resource Center.

Corporate Transparency Act: Implications for Business Startups

Corporate Transparency Act: Implications for Business Startups
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Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers, and certain individuals involved in their formation to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The beneficial ownership information (BOI) reporting requirements of the CTA are set to take effect on January 1, 2024. Those who disregard the CTA may be subject to civil and criminal penalties.

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

While the CTA includes 23 enumerated exemptions for reporting companies, newly formed businesses (Startups) may not qualify for an exemption before the date on which an initial BOI report is due to FinCEN. As a result, Startups (particularly those created on or after January 1, 2024) and their founders and investors, must be prepared to comply promptly with the CTA’s reporting requirements.

As an example, businesses may want to pursue the large operating company exemption under the CTA. However, among other conditions, a company must have filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales. By definition, a newly formed business will not have filed a federal income tax or information return for the previous year. If no other exemption is readily available, such a Startup will need to file an initial BOI report, subject to ongoing monitoring as to whether it subsequently qualifies for an exemption or any reported BOI changes or needs to be corrected, in either case triggering an obligation to file an updated BOI report within 30 days of the applicable event.

Startups also should be mindful that the large operating company exemption requires the entity to (i) directly employ more than 20 full time employees in the U.S. and (ii) have an operating presence at a physical office within the U.S. that is distinct from the place of business of any other unaffiliated entity. Importantly, this means that a mere “holding company” (an entity that issues ownership interests and holds one or more operating subsidiaries but does not itself satisfy the other conditions of this exemption) will not qualify. Startups may want to consider these aspects of the large operating company exemption during the pre-formation phase of their business.

Fundraising often requires Startups to satisfy competing demands among groups of investors, which can lead to relatively complex capitalization tables and unique arrangements regarding management and control. These features may cause BOI reporting for Startups to be more complicated than reporting for other small and closely held businesses. Founders, investors, and potential investors should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance, including with respect to the collection, storage and updating of BOI.

By ensuring all stakeholders understand the BOI reporting requirements and are prepared to comply, your Startup can avoid conflicts with current and potential investors and ensure that it collects the information that it needs to provide a complete and timely BOI report.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more.